How to Transfer an LLC Interest Agreement

By Tom Speranza, J.D.

How to Transfer an LLC Interest Agreement

By Tom Speranza, J.D.

A limited liability company (LLC) is a type of business entity that combines the liability protection of a corporation with the flexible structure of a partnership. The owners are known as members, and a member's equity is called a membership interest.

While most state laws allow shareholders to freely transfer stock in a corporation, unless there's a pre-existing agreement signed by the shareholders that restricts transfers, many states place major restrictions on the ability of a member to sell or transfer an LLC interest.

Man looking intently at his computer

To transfer an LLC interest, follow these steps.

1. Determine the applicable transfer rules.

You can find the rules for transferring a membership interest in the formation state's laws and in its operating agreement.

An operating agreement spells out the relationships between the members and the LLC and likely contains a process for transferring membership interests. If there is an operating agreement, its terms usually supersede state laws.

State Law Transfer Rules

Under most state LLC laws, a member cannot fully transfer a membership interest unless:

  • All other members consent to the transfer
  • The LLC records the transfer in its records
  • The assignee or purchaser signs or joins the operating agreement as a member

If these conditions aren't met, the assignment of a membership interest transfers only the assignor's economic interest in the LLC, or the right to an allocation of the profits and losses. This means the assignee or purchaser acquires no right to manage the business or exercise other powers of a member, such as voting.

Operating Agreement Transfer Rules

Most operating agreements replace the standard state law rules with more detailed procedures about when and how a member can transfer a membership interest. This is especially true if an LLC is a closely held small business where each owner understandably wants some control over who the co-owners are. The typical situations when an operating agreement requires certain votes or consents to complete a transfer of interests include:

  • Transfers if a member dies or becomes disabled
  • Proposed transfers or sales of an LLC interest to someone who is not currently a member
  • Transfers for financial or estate planning purposes

An operating agreement's transfer rules are often complicated. There might be a mandatory appraisal to value the LLC interest, options granted to other members to buy that interest or participate in the transfer, or a company obligation to redeem the interest.

2. Obtain the required votes or consents.

Once you figure out what procedures apply to the proposed transfer, it's time to document the required votes and consents.

If the members are required to vote to authorize a transfer of an LLC interest, either an in-person meeting can be held with the business's secretary keeping minutes of the proceedings or have the members sign a written consent.

If one or more specific members have options to buy the LLC interest that is being transferred or to participate in the sale, then a letter should be prepared for the members' signatures documenting their decision.

If the business itself must take some action or provide consent for an interest transfer, then the managers or officers should sign a document confirming the consent or that the LLC has taken the mandatory action.

3. Prepare and sign the transfer documents.

If the operating agreement permits the transfer or sale or the other members have granted their consent to the transaction, the LLC needs the following legal documents:

  • Purchase contract for the transferred membership interest. This contract must be signed by the selling member and the buyer that includes the price, payment terms, and any other agreements and warranties made by the parties.
  • Assignment of the membership interest. This document needs to be signed by the current member and the new member.
  • Joiner to the operating agreement. This agreement must be signed by the new member.
  • Revised schedule to the operating agreement. This document reflects the new list of members and the percentage ownership represented by their membership interests.

Review the rules set forth in your operating agreement or your state's law to see what actions need to be taken to transfer an LLC's interest. All of the necessary steps and documents must then be followed so that the transferred interest is done so correctly. Consider the assistance of an attorney if you need any help throughout the transfer process.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.